MauledAgain

Prof. James Edward Maule's more than occasional commentary on tax law, legal education, the First Amendment, religion, and law generally, with sporadic attempts to connect all of this to genealogy, theology, music, model trains, and chocolate chip cookies. Copyright 2004-2019 James Edward Maule.

Friday, June 29, 2018

Is Holding On To Tax Cut Failures Admirable Perseverance or Foolish Stubbornness?

Advocates of tax cuts for wealthy individuals and corporations not only continue to hold fast to their disproven theories, and not only crow about their December 2017 success in adding more tax cuts to those previously handed out to the elite, but continue to push for even more tax cuts. I suppose they won’t stop until all the wealthy individuals and corporations are paying zero taxes. And perhaps they won’t stop at that point, but will then propose that everyone else pay taxes to the oligarchs.

About a week ago, Christian E. Weller, in The Data Do Not Support Supply-Side Economics, explained why the claim that the wealthy individuals and corporations being granted the privilege of bearing less and less of the burden of keeping the nation running would use their tax break windfalls to create jobs and increase wages for American workers is nonsense. The proof isn’t in theoretical rebuttal of a flawed theory. It’s in the practical reality of what is happening on the ground.

Several weeks ago, the Federal Reserve disclosed that corporations have more money, but have not increased domestic investments. Keep in mind that for every paltry several-hundred-dollar-after-taxes bonus for one worker, some other worker lost a job. For every small increase in an hourly rate, there was an offsetting layoff somewhere else. Where did the additional cash go? Corporations held some of their windfalls, and plowed most of the rest into stock buybacks and dividends, benefits that accrue to very few working people.

In some future post I will explain how similar claims with respect to tariffs, namely, that increasing tariffs on imports is good for America and Americans, reflects the same defective thinking as does the supply-side theory of tax policy, a theory that its inventor now admits was a mistake. It’s sad that when someone makes a mistake, too often others are the ones who pay the price. It’s even sadder when the people paying the price for mistakes they did not make continue to support the perpetrators of the mistakes that cause the harm. Holding on to flawed theories, enduring the adverse consequences, and continuing to rally behind those inflicting the pain isn’t admirable perseverance. It’s foolish stubbornness.

Wednesday, June 27, 2018

When a Quid-Pro-Quo Gets In the Way of a Charitable Contribution Deduction

It was the first part of the headline to this Philadelphia Inquirer article that caught my eye and caused me to think of tax. The headline read, “He gave a $125K gift to Jefferson, expecting it would help get a marijuana growing license. Was it pay-to-play?” It ought not be difficult to guess what tax issue popped into my head. But first, the facts.

The story is confusing. Stories often are, when people are wheeling and dealing, jockeying for position, and trying to get the upper hand. It involves Pennsylvania’s foray into the world of legalized marijuana and cannabis research. Matthew Mallory, described as a marijuana entrepreneur, pledged $250,000 to Thomas Jefferson University, expecting that in return he would obtain an alliance giving him an edge in launching a medical marijuana business in Pennsylvania by getting a special relationship with Lake Erie College of Osteopathic Medicine. He paid half of the pledge, but two weeks later learned that Thomas Jefferson University would not be helping him as he expected. Mallory asked Thomas Jefferson University to return the money, but it refused. Mallory complained to the attorney general, but was told the university was not required to return the money. Mallory has explained, “I didn’t want to [make the donation], but we were told, ‘If you don’t do it, you’re not going to be part of this program.’” An official of Thomas Jefferson University stated that “There was never a promise of special favor with the commonwealth or any institution,” and the University denies giving any promises to Mallory. According to the University, Mallory’s gift gave his company simply the opportunity to be listed as a “founding supporter” of the University’s Lambert Center for the Study of Medicinal Cannabis and Hemp. Because the additional details aren’t germane to the tax question, they are not summarized in this commentator but can be found in the article. The entire sequences of events is typical of what happens when a pot of gold suddenly appears at the end of a road and the race is on.

So what was my thought? Suppose Mallory got what he expected. Would his “donation” qualify as a charitable contribution for tax purposes? Thomas Jefferson University qualifies as a charity for these purposes, so two questions popped into my head. First, to qualify as a charitable contribution, the gift must not be in exchange for anything of economic significance. So getting tagged as a “founding supporter” or having one’s name plastered on a wall doesn’t get in the way, but surely getting the benefit of a business affiliation, a marijuana growing license, or assistance in getting such a license is enough of a “quid pro quo” to bar the deduction. Now that Mallory isn’t getting anything, if he does not succeed in getting his money back, the anticipated quid pro quo ought not stand in the way. Second, if the donation is to assist in the development of marijuana cultivation, distribution, and research, which is illegal under federal law, and if the donation is not for something in return, is a deduction for the donation barred on tax law public policy grounds because of the federal restrictions, much like section 280E prohibits cultivators and distributors operating legally under state law from claiming their business deductions? In this era of say-one-thing-today-the-opposite-tomorrow-and-the-next-day-deny-having-said-anything-at-all-about-the-matter politics and public leadership in the nation’s capital, taking a guess at the answer is more of a gamble than predicting who wins the Super Bowl next year.

Monday, June 25, 2018

No “Redo” or “Reset” Button for Tax Fraud

Though it’s a well-settled principle that taxpayers who file fraudulent returns cannot escape the resulting fraud penalties by filing amended returns, a recent Tax Court case, Gaskin v. Comr., T.C. Memo 2018-89, reminds everyone, or perhaps lets some people know for the first time, that once the fraudulent return has been filed, that’s it. Unlike video games, there is no reset button. Unlike the “redo” opportunities sometimes afforded to novices, particularly children and other first learners, a fraudulent tax return cannot be set aside through a “redo” maneuver.

The facts of the case, when boiled down, are simple. The husband taxpayer filed fraudulent tax returns for 2008 through 2011 with intent to evade tax. He omitted gross income from each return. The IRS examination of the returns led to a criminal investigation that started in 2012, and indictment in 2015, and a plea agreement in 2015. In August 2014, while the criminal investigation was underway, the husband taxpayer filed amended returns for each of the four years, reporting additional adjusted gross income and tax. In 2016 the IRS assessed the tax shown on the amended returns.

In the plea agreement, the husband taxpayer agreed to amounts of adjusted gross income and tax higher than those reported on the amended returns. The IRS issued a notice of deficiency for 2008, 2010, and 2011, and asserted fraud penalties for 2008 through 2011. The penalties were based on the differences between the tax determined in the notice of deficiency and the tax liabilities reported on the original fraudulent returns. At trial, the husband taxpayer admitted to filing fraudulent returns and conceded the deficiencies in tax. However, he contested the fraud penalties.

The husband taxpayer argued that the deficiencies based on the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns were due to honest mistake. Thus, he concluded that no fraud penalty should apply to that portion of the deficiency. Further, he argued that because the deficiency reflected the difference between the tax determined in the notice of deficiency and the taxes reported on the amended returns, the fraud penalties should not apply.

The Tax Court noted that the regulations treat the amount shown on an amended return as an amount not shown as the tax by the taxpayer on his return for purposes of computing the fraud penalty. The court pointed out that in 1984 the Supreme Court held that “a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure; the fraud was committed, and the offense completed, when the original return was prepared and filed.” The Tax Court also pointed out it had followed that principle in a 1996 case in which it held that the filing of an amended return after an audit started did not purge the original fraudulent filing or fraudulent intent.

There are so many things in life and death that cannot be “undone.” There is no need to list them here, though when asked to make such a list, most people would not include “the filing of a fraudulent tax return.” Perhaps the prevalence of video and similar games with reset buttons makes it more difficult for people to understand that some decisions have consequences that cannot be “undone.” I wonder if a “if you file a fraudulent return you cannot escape penalties by amending the return” warning will fit on that postcard return that has been promised.

Friday, June 22, 2018

Taxes and Voting

According to this report, brought to my attention by reader Morris, bills have been introduced in both houses of the Michigan legislature to lower the voting age from 18 to 16. The rationale, as expressed by Michigan state senator David Knezek, is simple. "We allow 16-year-olds to go off and get jobs and pay taxes, but we fail to allow them to exercise their voice come election time. Young people are setting aside their differences and identifying issues they think need to change. And they can do everything to get that change except vote." Changing the voting age requires amendments to federal and state constitutions, which in turn requires approval by legislatures and by voters. In many instances the proposal would need legislative approval by more than simple majority.

Though it is an interesting, and perhaps logical, proposition, the idea of matching the right to vote with the payment of taxes poses a variety of problems. Certainly denying voting rights to individuals who do not pay taxes would not pass muster. Permitting anyone who pays taxes to vote would add to the voter registration rolls youngsters who pay sales taxes on purchases made with money that they earned performing work that youngsters under the age of 16 are permitted to do. I speak from experience. I started my first job when I was eight years old, and I have paid sales taxes ever since. But I wasn’t voting at that age, or at twice that age. I wonder, if I had the right to vote, if I would have exercised it wisely. Perhaps. Perhaps not. I think linking the right to vote to the payment of taxes is not a good idea.

One of the arguments against permitting 16-year-olds to vote is that they lack sufficient experience, insight, wisdom, understanding, and knowledge. The problem with that argument is that there are far too many people over the age of 18 who lack sufficient wisdom, understanding, or knowledge. Perhaps the benchmark should be attaining a sufficiently high score on a knowledge and wisdom test, applicable to citizens of all ages. Imagine, under such a plan, there might be a few twelve-year-old youngsters voting, and more than a handful of middle-aged individuals barred from the voting booth for lacking what citizens ought to have.

The paper that published the report asked people, “What do you think?” Of the 1,514 people who voted, 61 percent chose, “No: 16 is too young,” 30 percent chose, “Yes: They can handle it,” and 9 percent went with, “Either age is find by me.” What we don’t know is how many of the 1,514 poll participants were younger than 18 years of age.

But hang on. It won’t be long before the next voting question pops up. Should robots with artificial intelligence be permitted to vote?

Wednesday, June 20, 2018

A Hidden Tax Question

Reader Morris alerted me to something of which I was unaware. He began by directing my attention to this story written by the city manager of Milford, Delaware, explaining why he accepted Domino’s Pizza’s offer to provide $5,000 of assistance in filling potholes in the town. Like most local jurisdictions, especially those constrained by the siren song of the anti-tax crowd, Milford faced highway repair and maintenance costs that exceeded its revenue resources. So why is Domino’s Pizza doing this? According to another article to which reader Morris alerted me, the pizza chain has embarked on a “Paving for Pizza” campaign, ostensibly to “smooth the ride home” for pizza deliveries. And, yes, from a third story noted by reader Morris, Domino’s Pizza is “enjoying a feast of national media coverage.” The cost to the pizza company is low, because it is making $5,000 grants to as many as 20 cities or towns. That’s $100,000. For Domino’s Pizza, that is close to petty cash. Wherever a pothole is fixed with grant money, the put their tagline and logo on the asphalt. They also ask for cellphone photos of the work being done, to be used in advertising campaigns.

Reader Morris posed two questions to me. First, “Is there anything wrong with Domino's Pizza or other large corporations fixing potholes for publicity?” Second, “Should basic maintenance of public roads be handed off to corporations for marketing stunts?”

My response to reader Morris was short and simple, though it consisted of two parts. First, “Why not? Think of all the groups that get a sign (publicity) for taking over the litter cleanup for a stretch of highway. It’s a fair trade-off. “ Of course, some of the people picking up litter on designated stretches of highway aren’t running a business and thus whatever publicity they get is, at best, local fame. Some people who do this volunteer work are anonymous, and often decline having their names on a sign. Sadly, they are outnumbered by those who want the recognition, for business or other reasons. Even more unfortunate is the fact that both of those groups are outnumbered by those who can but fail to pitch in, thinking that their taxes are sufficient to cover the costs. Of course, that’s not the case.

Yet lurking behind that tax policy question was another one. The second part of my reply to reader Morris was probably inspired by decades of writing exam questions. “Another question is whether someone doing a service in exchange for publicity/advertising has compensation gross income.” Why do I think the answer is yes? A person who wants publicity in the form of a billboard, sign, a logo painted on a wall or street, or an advertisement on a web site or in a magazine or newspaper can pay cash, giving the owner of the billboard or other media gross income and giving the person making the payment a possible business expense deduction if the person is carrying on a trade or business. But suppose the person seeking the advertising offers, not cash, but goods or services. In this barter situation, the owner of the billboard or other media still has gross income, and the person who performs services has compensation gross income for performing services, or sales revenue if exchanging goods.

The key is valuation. Suppose a private construction company, instead of providing cash, offers the services of several of its employees to fill potholes. Keeping it simple, and ignoring the question of who provides the asphalt and the likelihood that all sorts of other legal questions, such as liability for injuries, complicate the picture, the construction company would have gross income equal to the value of the services, and an offsetting business expense deduction, for advertising, in the same amount. Computing the amount would be fairly easy, because it would reflect the hourly wages of the employees doing the work. But suppose several private individuals not operating a business enter into an agreement to pick up litter along a highway every week, and the state or locality posts one of those signs that acknowledge the work that those individuals are doing. There’s no offsetting deduction to the gross income. What is the value of the sign? Does it even have value? As a practical matter, even if it has value, it is probably so low that it’s not worth the IRS or a state revenue department paying attention.

But suppose the persons doing the litter pickup or filling potholes are provided with a real property tax credit for their services. What are the consequences? Presumably, the lower real estate tax bill would reduce the deduction for taxes paid. In light of the newly enacted, tax-raising provision of the tax “cut” legislation, perhaps a way around the new $10,000 cap is to permit people to reduce their real estate taxes by performing services that state and local governments would otherwise need to underwrite. Or would those sorts of arrangements cause revenue officials to treat these individuals, and companies, as performing services for compensation?

Monday, June 18, 2018

Should There Be Limits on Tax Credits?

When I ask if there should be limits on tax credits, I am not referring to dollar or percentage caps that limit the amount of the credit. I am referring to subject matter limitations. The Internal Revenue Code is packed with credits. State tax laws duplicate many of those credits, and then add hundreds more. I am not referring to payment credits, such as the credits for income taxes withheld from wages or estimated income tax payments. I am referring to what could be called policy credits. Federal and state tax laws provide credits for adopting children, for purchasing energy-efficient appliances, for purchasing certain alternative energy vehicles, for purchasing homes, for engaging in research, for clinical testing of certain drugs, for hiring veterans, qualified ex-felons, and other members of “targeted groups,” for making contributions to environmental protection funds, for producing movies, for purchasing automated external defibrillators, for producing musical and theatrical performances, and for being an active volunteer fire fighter or ambulance worker, to name but a few.

Proponents of these sorts of tax credits argue that these credits are financial incentives encouraging people to engage in behavior considered beneficial for society. One of my objections to using tax credits for these purposes is that it requires IRS and revenue department personnel to become experts in all sorts of activities, giving an advantage to taxpayers who choose to abuse the credits. If behavior is to be encouraged, it ought to be regulated and administered through agencies staffed with experts in the behavior in question. Another objection is the selectivity of the activities chosen for tax credits. Most, if not all, of the purposes for which tax credits are available surely qualify as worthy. But for every activity generating a tax credit there are five or ten or twenty activities that are no less worthy but that have not been deemed deserving of a tax credit. Another problem with policy tax credits is that we do not know who is taking advantage of the tax break, whereas direct spending programs permit taxpayers to identify the recipients.

People who read MauledAgain know that I am not a fan of policy tax credits. For example, in More Criticism of Non-Tax Tax Credits, I explained how the use of policy credits permits legislators to escape accountability for spending taxpayer money.

So it was no surprise when, several days ago, reader Morris directed my attention to a report about a new tax credit in New Mexico for hiring foster children, and asked, “Is this a good idea for a tax credit.” I doubt my reply was unexpected. “Of course not. What’s next, a tax credit for coming to a full stop at a stop sign?” To that I could add proposals for tax credits earned for driving without texting, opening doors for people carrying babies, picking up trash in the streets, reading to disadvantaged children, and that doesn’t even begin the list.

One of the objections raised by the anti-tax crowd to income and wealth taxes is the redistribution of money from those who are taxed to those who benefit from government spending. Yet the same crowd is comfortable with, and rarely criticizes, policy tax credits, which are simply another form of spending disguised in ways that permit legislators to hide their giveaways under the radar. Every dollar shelled out in a policy tax credit either comes from a taxpayer today or from a taxpayer tomorrow when the budget deficits come home to roost.

Of course it is a good thing to hire foster children. It’s also a good thing to hire veterans, and disadvantage individuals, and the homeless, and and and. But programs to encourage targeted hiring ought to be administered by agencies with employment expertise, not revenue departments, and funded with grants and payments that permit all taxpayers to identify the recipients.

My prediction is that the list of tax credits will continue to grow. Professional politicians and their lobbyist companions aren’t going to surrender what is a good thing for them until America wakes up. That’s unlikely to happen anytime soon.

Friday, June 15, 2018

Trickle-Down Variation Is No Better Than Trickle-Down

Reader Morris sent me a link to an article of a little more than a week ago. In the article, Joseph Lawler reports on comments made by JPMorgan Chase CEO Jamie Dimon. Dimon was defending the December tax cuts against criticism that most companies are using most of their tax breaks to pay dividends and buy back stock, which puts most of the tax break money in the hands of the wealthy. Dimon argued, “"I think it’s a tremendous error for people to think there’s something wrong with stock buybacks and dividends. That is a natural function of capital markets and the proper deployment of capital." He continued to explain that “Companies return money to investors when they don’t have a good use for it.” Investors then “put the money to a higher and better use." He capped his defense with this gem, “"For the life of me, I don’t understand how anyone can say that’s a bad thing. That is coming from people who are basically ignorant of how capital markets function."

Dimon’s defense of dividend increases and stock buy-backs is a variation on trickle-down. The company could (1) reduce its prices (helps the average person), (2) raise wages (helps the average person), or (3) increase payouts to the wealthy (helps the wealthy). The notion that the wealthy who get these funds would then do things that benefit average people is, well, about as accurate as the notion that tax cuts for the wealthy help the average person.

To that I add the following:

To the extent that “companies . . . don’t have a good use for” the tax break money, it demonstrates that the begging and lobbying for the tax breaks on the basis that the money was needed to create jobs and raise wages was yet another empty promise to which too many people either succumbed or adopted as their own in exchange for votes, money, or some other consideration. If capital markets cannot recognize the need to put the money in the hands of consumers who will buy the companies’ goods and services, then the capital markets are flawed. But, of course, those who carefully study capital markets know that they are flawed. The experience of a decade ago proves that point.

As far as the ignorance question goes, I didn’t answer Morris directly. Those who criticize how capital markets function are fully aware of how they function, but also are aware of how the way capital markets function benefits a handful of people and leaves everyone else behind. Economic data showing the trends of the last 37 years proves that point. None of this is a matter of ignorance. Supporters of tax breaks for the wealthy riding on nonsensical trickle-down economic theory and supporters of demand-side economic theory all know quite well the practical reality of the marketplace. Left unregulated, it spirals in the direction in income and wealth inequality and the destruction of civilized society in favor of oligarchies free from resistance in the voting booth.

Wednesday, June 13, 2018

A Tale of Taxes and Bridges

Sometimes stories teach lessons much more efficiently, and interestingly, than do recitations of law and policy. In his recent report Daniel C. Vock shares a sad tale of how tax aversion is causing misery for everyone, including those who detest taxes and resist them at all costs.

The story takes place in Mississippi. It begins 31 years ago, when those opposing the governor’s plan to eliminate elected transportation commissioners and put control of highways under the governor’s control devised a plan to raise the gasoline tax by five cents and use the revenue to build four-lane highways, which at the time were far and few in the state. The prediction was that the improved highways would attract businesses that could not ship good using the state’s antiquated two-lane roads. The legislature passed the bill, the governor vetoed it, and the legislature overrode the veto. More than a thousand miles of four-lane highways were built and, indeed, businesses, including Nissan and Toyota, opened facilities in Mississippi.

But there was a problem. The revenue was sufficient to build the roads, but there were no sources of funding to maintain and repair the roads. Over the years, gasoline tax revenues decreased for the same reason they did in other places, namely, vehicles became more fuel efficient. Like too many jurisdictions, Mississippi did not index its gasoline tax for inflation. So while inflation increased by 108 percent during those 31 years, and construction costs rose by 217 percent, gasoline tax revenues increased by a barely noticeable 1.6 percent.

The outcome could have been, and should have been, predicted. Roads and bridges began to fall apart. Many are in such bad shape that they need to be rebuilt rather than simply repaired; rebuilding costs roughly ten times the cost of repair. State transportation officials have told legislators that fixing the roads and bridges requires at least a $400 million annual permanent revenue increase. Expansion of existing roads in areas where the population and business are growing isn’t happening. Congestion spreads. Motorists face more costs from sitting in traffic.

So transportation officials, supporters, some members of the public taking advantage of sitting down and letting themselves get educated about the facts, business groups, and some others have lobbied the Mississippi legislature. They failed. Within a week, the state shut down 83 bridges because they are deficient and unsafe. During the ensuing weeks, more were closed. As of the time Vock wrote his report, about 500 bridges are closed. Many are in rural areas, perhaps where anti-tax sentiment breathes most strongly. Mississippi motorists face 40 to 50 mile detours. First responders cannot get to incidents as quickly as necessary.

Putting it mildly, Volk writes, “Today, anti-tax groups like Americans for Prosperity are very influential in Mississippi. That organization, for example, spent at least $10,000 last year on direct mail and digital marketing to praise Lt. Gov. Tate Reeves, who presides over the Senate, for thwarting efforts to raise the state’s gas tax or to use tax proceeds from online purchases to fund transportation. Eleven of the state’s 52 senators attended an Americans for Prosperity event last year where several promised not to raise the gas tax.” Grover Norquist must be proud. I wonder if these folks cheer when a house or barn burns down because the firefighters could not get there in time, or when a child hit with a seizure or an adult suffering a heart attack dies because the ambulance needed to go 40 miles out of the way. The state director of Americans for Prosperity defends the legislators failure to deal with the problem because they, along with the governor, “all campaigned on being for lower taxes, smaller government and less regulation. People are living up to what they promised voters. Voters are overwhelmingly opposed to increasing the gas tax.” Of course they did, because they fell for the propaganda. Or perhaps they, too, are cheering the house fire and the deaths, and luxuriating in those 50-mile detours. Or perhaps they live in areas where those afflictions become something that “is someone else’s problem.”

A county engineer concludes his explanation of how, over the years, the lack of funding has caused things to deteriorate, by saying, “We’re going backwards.” Indeed. That’s what insufficient public revenue to support public services will do. It reverses the path of civilization and nations and opens the door to barbarism.

The idea of reducing or eliminating taxes, to say nothing of opposing tax increases, is one of those grand theories that rests on foolish assumptions that shrinkage and eventual elimination of government – to be replaced of course, by an authoritarian oligarchy beyond the reach of the voting booth – and that carries enough “buzz” to resonate well in sound bites. People are sucked in. Yet when practical reality raises its head, it crushed theory. In this case, it very well may crush not only those whose anti-tax cult addiction threatens the lives of Mississippi residents but also those who recognize the danger but whose words of warning are ignored.

So I add Mississippi to the list of states whose subscription to the anti-tax movement has caused nothing but pain and misery. It joins Kansas, Louisiana, and Oklahoma as experiments whose outcomes should cause all Americans to resist following their example and imposing those failed ideas on the entire nation. I have my doubts that enough Americans will understand the danger until it’s way too late.

Monday, June 11, 2018

Tax Law Aggravation: Is It the Theory or the Practical Application?

A recent case, Johnson v. Comr., T.C. Summ. Op. 2018-31, provides an opportunity to examine whether it is the theory or the practical application that makes tax law so aggravating. Of course, it could be both.

On his 2014 federal income tax return, the taxpayer claimed dependency exemption deductions for his two children and a child tax credit. He also claimed an earned income tax credit but that’s not within the focus of this discussion. In support of his claims, the taxpayer attached a schedule EIC on which he represented that the children resided with him for seven months during the year. The IRS disallowed the claimed dependency exemption deductions, the child credit, and the earned income tax credit.

The taxpayer had been married, and he and his then wife had two children, born respectively in 1999 and 2000. The taxpayer and his wife divorced in or about 2008. The support and custody agreement into which they entered provided for the taxpayer and his former wife to have joint legal custody of the children, with the former wife having sole physical custody but with the taxpayer having “access to the children” for one weekend per month, for one month during the summer school vacation, and on Christmas, New Year’s, and Easter in “odd” years and on Thanksgiving in “even” years. The agreement also provided that “every year, the children’s birthday shall be spent with Mom if it’s during school or during the week. And, if it happens to fall on a weekend, then Dad has a right to have the children on the children’s birthday.” The agreement also provided that “Mother’s Day will always be spent with Mom; Father’s Day with Dad.” At trial, the taxpayer testified that although there were no formal modifications made to the agreement by, or under the auspices of, the family court, he and his former wife informally made “adjustments as needed” between themselves.

The taxpayer and his son, no longer a minor at the time of trial, testified that the children stayed with their mother during the school week but that the children otherwise stayed with petitioner every weekend and holiday and throughout summer vacation. They testified that the children were picked up after school on Friday and dropped off Sunday night. The taxpayer acknowledged that “every once in a while” the children “might go to California for a holiday with their mother,” that they saw their mother during the summer, though “very rarely, and that he had the children for “the majority” of the holidays but not every holiday, although according to petitioner it was “a very rare occasion” when he did not. During 2014 the taxpayer’s former wife lived in Gaithersburg, Maryland, where the children attended public school. During 2014 the taxpayer lived in Baltimore, Maryland.

The Court explained that the parties agreed that the taxpayer met the requirements for treating each children as a qualifying child, except for the requirement that the children have the same principal place of abode as the taxpayer for more than one-half of the taxable year. The taxpayer argued that the children spent both a majority of hours and a majority of days with him in 2014. However, the court characterized the record as “much too wanting to support an analysis by hours, as any such analysis requires supposition and assumption.” Instead, the court decided that “only an analysis by days is possible.” But then the court concluded that “at best, given the meager record, any meaningful analysis can be based only on the number of nights that the children slept in the home of each parent.

In his brief, the taxpayer claimed that the children spent every weekend, every holiday, and the entire summer break with him and that the children were never with their mother other than during the school week. The court characterized this as “improbable.” For example, the court wondered why the children, who were teenagers in 2014, “were so willing to be away from school friends for so much of the time,” and whether it was likely that “a boy and a girl” were so inseparable “that each always slept in the same parent’s home as the other.” Although the court noted that it is not bound to accept testimony that is improbable, unreasonable, or questionable, it would nevertheless, “indulge” the taxpayer and proceed with the analysis advocated by the taxpayer. The court, however, concluded that it was more likely that on school holidays in the middle of the school week the children “continued to reside with their mother in order to more conveniently complete the school week” and that it was unlikely the children would travel to Baltimore for just one night.

The court pointed out that the number of nights that the children slept in the home of each parent could not be decided with certainty or any degree of incontestable precision on the limited record in the case. Each party’s analysis and the court’s independent analysis demonstrated that the issue was exceptionally close. However, after weighing all the available evidence, and keeping in mind the taxpayer’s burden of proof, the court concluded that the children spent 175 nights at the taxpayer’s home in 2014, and that, because 175 nights is less than one-half of the calendar year, the taxpayer had not proved that children had the same principal place of abode as he did for more than one-half of the taxable year. Because the taxpayer was not the custodial parent, and because there was no evidence of a written declaration by the taxpayer’s former wife who was the custodial parent agreeing to shift the dependency exemption to the taxpayer, the disallowance of the dependency exemption deduction and the child tax credit were upheld.

The theory is not particularly complicated. One requirement for classifying a child as a qualifying child is that the child have the same principal place of abode as the taxpayer for more than one-half of the year. Yet determining a person’s principal place of abode requires counting nights, and proving to the IRS and to a court that the number of nights equals or exceeds 183, or, in a leap year, exceeds 183. This is where the practical reality shows up. How many separated and divorced parents know that it is essential, for tax purposes, to keep logs or similar records of which children spent which night with which parent? How many, know that it is essential to do this, actually do this? How many intend to do this, and try, but caught up in the whirlwind of life with children, with school events, doctor appointments, sporting, dance, literary, musical, and other lessons, vacations, and other activities, forget to make a notation? I can almost hear some people advocating the use of Alexa or similar technological “assistants” to keep track of this sort of information, and I suppose the advocates of ReadyReturn would suggest that the information Alexa and similar devices gather from people’s homes be transmitted to the IRS so that the IRS can prepare the taxpayer’s return with the data needed to determine if the taxpayer is entitled to the various tax benefits related to a child.

So what is most aggravating? The theory? Or the need to keep track of just about everything one’s child does? We are spending more time reporting what we are doing that we spend doing what we are doing. Surely there is a better way. Unless it is found soon, the tax system will collapse of its own weight. So, too, will everything dependent on taxes.

Friday, June 08, 2018

Some Tax Zappers Have Been Zapped, Lightly

It has been more than six years since I wrote about tax zappers in Zap the Tax Zappers. Briefly, a tax zapper is software that is connected to a checkout register to eliminate some of the retail establishment’s sales. The establishment’s owner not only pays income tax on an amount lower than the actual taxable income, but also pockets any sales taxes paid by customers on sales deleted from the owner’s tax reports to state and local tax authorities. When I wrote that commentary, I suggested that “the acts of designing, programming, marketing, and producing this software” and that “It’s time not only to criminalize ownership, use, design, production, sale, or other activities with respect to tax zappers, it’s time to make the penalties sufficiently harsh that others are deterred from engaging in this sort of dishonest behavior.”

A few days ago, according to this article, Pennsylvania honored some Department of Revenue employees whose careful audit and investigation work generated roughly $6.3 million in taxes avoided by business owners using zapper software. That’s a small portion of the estimated $100 to $200 million that the state loses each year because of zapper use. Considering how much it costs to hire and train revenue auditors, it might make sense to hire several dozen more of them because the return on that investment would be quite high. According to the article, the sale, possession, and use of zappers is now illegal in Pennsylvania, though the maximum penalty is only one year in prison and a $10,000 fine. I found interesting the fact that those who were caught operated businesses in the restaurant industry, because in Zap the Tax Zappers I had noted, “Some establishments, such as restaurants, are evading so much tax that they are paying their employees in cash under the table, permitting the employees to report income low enough to qualify for welfare assistance from the state.”

According to the article, the Department of Revenue has not yet identified any of the taxpayers who were discovered to be using zappers, nor have any of them yet been charged with a crime, though a spokesperson for the Department explained that charges would be filed “when feasible.” In Zap the Tax Zappers. I explained why those who are caught using tax zappers ought to be identified:

For the most part, tax cheats are not acting from a philosophical approach. People who object to taxes and fail to file returns, or who file returns tagged with all sorts of anti-tax or other rebellious messages, aren’t hiding their position or their actions. They’re much easier to identify and may want to be identified so that they can make a statement. There’s a perverse sort of courage in behaving that way. Tax cheats who use tax zapper software do not want to be identified. They simply want to let others bear the burden while they take a free ride. They are probably among the folks who don’t want to pay for health insurance but demand free treatment when they have an emergency and show up at the urgent care clinic. The behavior exhibited by the tax cheats and free riders is about as far from courageous as one can get.

* * * It’s also time to publicize the names of those who are convicted, the names of their businesses, and the amounts that they have stolen from the public.

. Though some anti-tax individuals might view zapper users as heroes, consider the impact of tax evasion, as I explained in Zap the Tax Zappers:

Taxpayers who comply with the tax law but who are concerned about high tax rates ought to think about the impact on the tax system of tax cheaters. When a tax cheat fails to pay tax, one or more of three things can happen. Taxes on honest taxpayers are raised to maintain revenues. Spending is cut, leaving honest citizens with deteriorating roads and bridges, inadequate safety inspections, reduce police patrols, longer waits for fire fighters and EMTs, and all other sorts of deprivations that jeopardize the existence of civilized society. Governments incur deficits as revenues drop and programs are maintained because the impact of spending cuts is so devastating.

It is for those reasons that I suggested that those who think publishing the identities of tax zapper users and increasing criminal penalties might be too harsh instead “think of the person who dies when their vehicle hits a pothole and goes out of control, a pothole not repaired because of revenue shortfalls and spending cuts triggered by the actions of a group of people who refuse to pitch in and fulfill the obligations of citizenship.” Though $6.3 million is a good start, it’s nowhere near enough. It’s time to ramp up anti-zapper efforts.

Wednesday, June 06, 2018

Can A Tax Stop Gossip?

According to this recent report, Uganda’s parliament has enacted a daily tax, equivalent to 5 cents, on people who use internet messaging platforms, because, according to the nation’s president, those platforms allegedly encourage gossip. The nation’s minister for finance explained that the tax and others in the same legislation were needed to reduce the country’s national debt.

This tax is an excellent example of a theory destined to meet practical reality. When that happens, theory rarely, if ever, prevails.

The challenges of implementing the tax are daunting. For example, according to the report, Uganda “is struggling to ensure all mobile phone SIM cards are properly registered.” Yet phones are not the only devices with which a person can access the internet. In Uganda, 30 percent of phone users do not access the internet, let alone use social media sites. Identifying the individuals who should pay the tax will not be an easy task, and it is likely that some who are taxed will be individuals not using social media and that some who escape taxation are people using social media.

When the nation’s president proposed the tax, he also suggested that internet data ought not be taxed because it was useful for "educational, research or reference purposes." Does the president of Uganda not realize that information exchanged on social media is data? Does he not understand that information of any sort, whether educational or gossip, consist of zeroes and ones?

There is no proof that a tax on social media would stop gossip. Aside from the fact that some users would consider a tax amounting to roughly $1.50 per month to be a nuisance and that others would not even contemplate the existence of the tax when posting to a social media account, there is no evidence that the tax would change the content of what people post to social media accounts.

During the last presidential election, Uganda shut down access to social media platforms, in order to “stop spreading lies.” Though this action surely reduced an important channel for the false information that propaganda devotees, trolls, and other miscreants use to dupe people, lies also can be circulated in newspapers and magazines, on television “news” shows, by word of mouth in schools and offices, and at the neighborhood tavern.

Stopping lies is a noble goal. A tax is not going to get the job done. There are other possibilities. Tanzania requires bloggers to pay a license fee and disclose their financial backers. Incidentally, MauledAgain has no financial backers. Again, determining that a blogger is giving truthful information about the identities of those underwriting a blog is no easy task. In fact, it is pretty much impossible. Kenya has criminalized the spread of false information, though that law has been suspended by a court while opponents challenge it. The time and effort required to determine if information is false, to identify the source of the falsehood, and to decide which parties in the chain of distribution from the liar to the posting, will far surpass any revenue generated from fines and penalties.

There is no one antidote to lying. Surely it is not a tax. It is a combination of early childhood learning in the home, education of children in the schools, continued self-education by adults, imposition of adverse consequences in appropriate situations, cultural unwillingness to tolerate lies, social willingness to ostracize liars, and adherence to truth-telling by politicians, candidates, campaigns, and national leaders. For every smoker or would-be smoker who stopped smoking or declined to pick up the habit because of tobacco taxes, there surely are hundreds if not thousands who distanced themselves from smoking because of education campaigns teaching why smoking is dangerous and unhealthy for the smoker and those with whom the smoker interacts. Imposing a tax is, in some ways, much easier than educating people. In the long run, though, it is education that carries the day.

Monday, June 04, 2018

Last week, in a Washington Examiner commentary, George Pieler presented arguments against permitting states to compel nonresident vendors to collect use tax on their behalf. In one sense, now that the Supreme Court has a case under consideration that deals with this issue, the time for arguments has gone by, at least for the moment. On the other hand, it would not surprise me if the Supreme Court’s disposition of the case re-opens the need to continue debating the issue.

Pieler makes several arguments. First, he points out that if South Dakota, the state whose attempt to force nonresident merchants to collect taxes on its behalf is being considered by the Supreme Court, prevails, it will open the door to hundreds of states and localities subjecting nonresident merchants to the rigors of collecting use tax. In several of my posts listed above, I have explained why that outcome would be disadvantageous to businesses, consumers, and the national economy.

Pieler points out that South Dakota has admitted drafting a statute that reaches to the far ends of the nation “in order to test how far t coul dgo while keeping enough of a semblance of a nexus to get the court to change its precedent.” That’s not a reason for South Dakota to lose. There are times when the best way to identify the limits of legislative prerogative is to draft a statute that can be tested. The problem isn’t the way South Dakota maneuvered. There’s no rule requiring legislatures to be timid, though at times it might be politically prudent to be careful. The problem is what he statute enacted by the South Dakota legislature requires.

Pieler takes apart the claim by South Dakota that it is losing tax revenue because purchase transactions are increasingly shifting from brick-and-mortar stores within the state that collect sales tax to online shopping sites that don’t collect use tax if they lack a meaningful connection with the state. Pieler explains that South Dakota’s actual revenue loss might be only one-fourth, or perhaps even less than one percent, of its claimed estimate. Another factor in why the estimate is much higher than the actual revenue loss is the fact that there have been steady increases in the number of online merchants who do have sufficient connection with the state. In other words, as Pieler puts it, perhaps South Dakota does not have the revenue loss problem it claims it has.

Pieler laments that the economic arguments presented to the Supreme Court were “so narrowly drawn.” I agree. They were. Dealing with the economic arguments requires analyses that weren’t undertaken, which Pieler describes in his commentary.

Because states cannot compel a business to do use tax collection for it unless the business has nexus with the state, some states are attempting to expand the definition of nexus so that it makes nexus exist under pretty much all circumstances. For a variety of reasons, it is wrong, both as a matter of policy and as a matter of efficiency and administration, to require businesses lacking a real connection with a state to do use tax collections for the state. * * * What is being imposed on the retailers is the aggravation and financial cost of being required to collect taxes for a state with which the only connection is the ability of a resident of that state to view a retailer’s web site on servers not located in that state.

Compelling a business to collect use tax for a state * * * force[s] out-of-state retailers to function as tax collectors for the state. It constitutes a radical expansion of government police power. In that context, objections can be raised that might not find strong ground if the proposal to expand nexus is viewed as an expansion of the taxing power. * * *

* * * Compelling a business to collect use tax for a state is “forcing a business to do work without representation.” That is, in some ways, a more serious matter. The use tax itself, like a sales tax, can be passed along to customers, because they are the ones with an existing legal obligation to pay that tax, though few do. The cost and aggravation of functioning as a tax collector for a state in which the retailer does not do business can be passed along to customers only if the retailer wants to risk losing customers because of the price increase.

Perhaps a better approach is for states to seek voluntary contracts with out-of-state retailers, compensating them for serving as tax collectors. There may be state Constitutional provisions or legislation that prohibits contracting tax collection to out-of-state individuals or entities, though I doubt that is the case. For some businesses, being compensated to engage in use tax collection might help the bottom line.

If state governments and out-of-state merchants found a way to communicate productively, the problem could be resolved rather easily. It’s not too late, though depending on what the Supreme Court decides, getting the parties to sit down and work out something that is practical could turn out to be more or less challenging than it would have been a year or two or five or ten ago. I do doubt, though, that the Supreme Court’s decision will resolve this ongoing disagreement over who should be enforcing a state’s use tax law.

Friday, June 01, 2018

Most Taxpayers Do Not Know They Are Handing Out Billions to Corporations

The other day, reader Morris presented me with a question that is the title of a New York Times editorial by Nathan Jensen. The article headline asks, “Do Taxpayers Know They Are Handing Out Billions to Corporations?” My answer is not a simple yes or no. My answer is that most taxpayers do not know. And of those who do know, there are some taxpayers who are quite pleased, because what is coming into their corporation is far more than what is going out of their pocket as a share of the burden imposed on all taxpayers. And, of course, there are those who do know but who don’t care, because “it’s too complicated” or “it’s politics” or “I have other things to worry about.”

Jensen points out that “Every year, states and local governments give economic-development incentives to companies to the tune of between $45 billion and $80 billion.” He explains that the wide range reflects the inability of the public to know exactly what is being shoveled into corporations by government officials. He describes some of the ways that taxpayer money ends up in the hands of those who have far less need of money than just about every other American. They include cash grants, reductions in every sort of tax, construction of facilities for the corporation using public funds, and even rebating taxes paid by corporate employees so that those funds end up in the corporate treasury.

Jensen notes that in many instances these deals are being negotiated by lobbyists and not by legislators or executive branch officials. That’s no surprise. Who do you think wrote the federal tax law enacted in December? If you respond with the old civics course answer, “the Congress,” you are way behind the times in terms of the reality of governance. Increasingly, in my opinion, governance is shifting from elected representatives to employees of, and consultants to, the oligarchy. And those folks surely want as many of these deals kept secret, and when deals become known, they still want as many details and components kept under wraps as they can manage to hide. Jensen explains that one reason for the secrecy is the unwillingness of corporations getting these handouts in exchange for their promises of economic benefits inuring to the state or locality to subject themselves to post-handout examinations to determine if the promises were kept. Is this yet not another reason to make tax breaks available only after the tax break recipient performs what has been promised, as I suggested in How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?.

Jensen sees hope in a recent Elon University poll that surveyed residents of the twenty locations making the finalist list for the Amazon tax break giveaway contest. According to the poll, the percentage of respondents supporting the proposition that Amazon should be offered as much as possible ranged from 8 percent in Austin to 21 percent in Los Angeles, whereas the percentage supporting either the proposition that there should be no financial incentives or nothing more than other businesses receive ranged from 32 percent in Indianapolis to 59 percent in Denver. When asked if they would be willing to pay more taxes to fund financial incentives for Amazon, those responding in the affirmative ranged from 14 percent in several cities to 26 percent in Indianapolis, and those responding in the negative ranged from 74 percent in Indianapolis to 86 percent in several cities.

Those taking a theoretical view claim that these issues can be resolved in the voting booth. I disagree. The practical reality is that taxpayers rarely get the opportunity to vote on these deals because many of the deals are hidden, and most of those that are disclosed aren’t put to a vote. In the latter situation, the best that taxpayers can do is to vote out the politicians who agree to the deal, though that comes too late for the deals already in place, and comes at the cost of voting out a politician whose position on other issues, or even a single issue, gets the attention come election time.

Changes are needed. Yet changes cannot be made until enough people realize changes are needed. Unfortunately, with too many people elevating ignorance to the position of a deity, the chances of this plundering of taxpayer dollars happening before the oligarchs own and control everything are diminishing rapidly.